South Korea's four major commercial banks (KB, Shinhan, Hana and Woori) posted record combined net profit of about 14 trillion won last year. At the same time, bad loans have also snowballed, and related asset quality indicators continue to worsen.

This is because vulnerable borrowers such as self-employed people and small and medium-sized enterprises have been unable to repay principal and interest on time, amid years of sluggish economic growth since the COVID-19 pandemic.

With the recent recovery also led mainly by a small number of large exporters, there are concerns the situation will worsen if interest rates rise during 'K-shaped' (polarised) growth concentrated in certain industries and groups.

◆ Banks' net profit rises despite base rate cuts and falling NIM... "Because loans increased"

As of Feb. 8, the financial sector put the four banks' combined full-year net profit for 2025 at 13.9919 trillion won. That is a record high, about 5 percent more than the previous year’s 13.3435 trillion won.

Most bank earnings come from net interest income based on the interest-rate spread between loans and deposits.

Compared with 2021, when net profit was 10.0316 trillion won as loans began to expand rapidly alongside ultra-low interest rates during the effort to overcome COVID-19, net profit surged 39.4 percent, or 3.9603 trillion won, over four years.

The Bank of Korea cut its benchmark interest rate twice last year, in February and on the 5th, but the four banks' profit growth did not let up.

The four financial holding companies commonly explained that despite concerns about worsening profitability due to base rate cuts, they defended net interest income by increasing banks' loan assets.

As interest rates fell, banks' annual net interest margin (NIM) generally declined, but total net interest income increased as lending continued to grow.

◆ NPL coverage ratio plunges 33 percentage points... "Polarisation and higher rates may expand SME and self-employed delinquencies"

The problem is not only that the size of normal loan assets has grown. Bad loans with uncertain repayment have also expanded quickly.

According to factbooks released by the four financial holding companies alongside their results, the combined total of precautionary loans (delinquent for 1 to 3 months) at their banking units stood at 7.9291 trillion won as of end-December, the end of the fourth quarter last year.

That is 11 percent more than the previous year’s 7.1146 trillion won and 49 percent more than 2021’s 5.3093 trillion won.

The size of precautionary loans has continued to rise: 5.3093 trillion won at end-2021, 6.0623 trillion won at end-2022, 6.2918 trillion won at end-2023, 7.1146 trillion won at end-2024 and 7.9291 trillion won at end-2025.

Substandard or below loans (NPLs, delinquent for three months or more), which are worse than the precautionary stage, were tallied at 4.5489 trillion won, up 14 percent from end-2024. It was also the highest level since 2021.

As a result, the NPL ratio (simple average, 0.30 percent) rose 0.03 percentage points to the highest level in five years.

By contrast, the four banks' simple average NPL coverage ratio (loan-loss reserves balance/substandard or below loans), a gauge of their ability to absorb losses, fell to 171.7 percent. Compared with 204.3 percent at end-2024, it plunged 32.6 percentage points in a year, breaking below 200 percent and marking the lowest level since 2021.

An official at a commercial bank said banks have built up substantial provisions each year since the COVID crisis to prepare for possible deterioration in asset quality. But the sharp drop in the NPL coverage ratio means loss-absorbing capacity and buffers are being rapidly depleted as loan delinquencies have materialised since 2024, the official explained.

An official at another commercial bank said bank soundness indicators worsened sharply during the financial crisis, then improved due to regulators' demands and banks' efforts. The official said the trend has again worsened quickly since the COVID crisis and that it is effectively the worst situation since the early to mid-2010s, shortly after the financial crisis.

Another bank official said banks have increased net interest income by expanding their balance sheets through lending, but delinquencies are accelerating, particularly in the corporate sector, as growth becomes polarised amid an economic slowdown. With the Bank of Korea recently signalling an end to base rate cuts and market interest rates turning upward, the official said loan quality could deteriorate further, especially among small firms and individual business owners, and added that banks need pre-emptive measures.

[Yonhap News Agency]